Managing risk is a key issue for any business and insuring against risk in an uncertain world is seen as sacrosanct in boardrooms across the country.

As the corporate world responds to an increasingly litigious environment, protecting against liability now envelops employees, equipment, real estate, creditors and protection against the actions of fellow board members.

As such, corporate insurance is big business – huge business, in fact, according to figures published by the National Fraud Authority (NFA).

In a recent report, published in June 2013, NFA states the UK insurance industry is the largest in Europe and the third largest in the world, after the USA and Japan, accounting for seven per cent of total worldwide premium income.

The report described the insurance industry as a “vital part of the UK economy, managing investments amounting to 26 per cent of the UK’s total net worth” which “employs more than 290,000 people in the UK alone and contributes £10.4bn in taxes to the government”.

As with any business generating tens of billions of pounds in revenue, carpetbaggers are never far from view, though assessing the extent of criminality in the corporate insurance sector is nigh on impossible to quantify.

In fact, the closest the Association of British Insurers (ABI) has to a measurement of corporate insurance fraud is a breakdown of corporate motor and property insurance, showing 9306 commercial motor claims made in 2013 with a value of £131.9m and 3,152 commercial property claims with a value of £67.5m.

When viewed against 2012 figures, the rate of corporate insurance claims in both corporate motor and property had fallen dramatically in 2013, given 7,972 claims were made against commercial motor insurance valued at £92.9m and 5,146 commercial property claims with a value of £84.4m.

Edward Bruce, chief executive of broker Bruce Stevenson, suggests the fall in property claims and payout value last year may be down to insurers becoming more averse to providing policies on certain property types.

“Claims on property certainly shot up in the recession, particularly unoccupied property, though insurers are now looking much more closely at those types of claims, taking into account forensic evidence and so forth, but as a result insurers are now less keen on certain classes of property as a result.”

The banking crisis brought with it some startling home truths for the insurance sector, crowned by the collapse of US multi-national insurance firm American International Group (AIG), which collapsed under the weight of its exposure to an obscure insurance hedging product – credit default swaps – which in boom times had been a profitable money spinner but caused a near-fatal contagion when the money markets froze in 2008.

Some of the other profitable insurance products offered by banks to business customers after the banking crash, notably interest rate swaps – a form of insurance against interest rate rises – proved to be a huge financial burden for many firms when interest rates plummeted.

Calum MacLean, risk manager with Lockton Companies LLP suggests a key failing in the years leading up to the banking crisis was a culture of sales driven performance in lieu of proper due diligence – an area he says is now being addressed, particularly in relation to property, which had underlined questionable lending practices in the years preceding the 2008/09 crash.

He says: “Clients of lenders now have to justify they are as good a risk for a lender, and in another area we are seeing risk passed on is from the lenders to their solicitors who conduct due diligence on behalf of the lender.

“That has become increasingly evident in, say, the last five to six years, and that is having a massive impact.

“At present I would say between 25 and 30 per cent of the claims made against solicitors come down to lender claims, and while this type of insurance has always been a feature, as you would expect in an economy which is so property driven, in big value transactions the claims risk is also higher, and in some parts of the residential market where there was perhaps poor risk management in the run up to the recession.

“But it must be remembered this was also at a time when solicitors were working in what was a very competitive market and the pressures on margins, with products like fixed-fee conveyancing and online offerings, served to push the price of conveyancing down.”

Bruce says insurers are now demanding more detailed evidence to ensure the businesses they lend to are properly protected.

“In the years leading up to the banking crisis, those demands were perhaps not quite so prescriptive, though now lenders want to see evidence of how a business intends to protect itself, and very often will insist on due diligence being carried out on an insurance policy, and that applies to any sector where there is money being lent.”

Bernard Dunn, client director at TL Dallas, says the recessionary effect on the insurance market merely served to create even greater competition for a dwindling pool of premiums.

“The insurance market tends to be cyclical, and in the recession – despite a rise in claims – we didn’t see rates increasing because insurers lost so many premiums from clients either cutting back or going out of business, and that meant pressure to win new clients in an increasingly competitive market.

“So what we have seen is, the levels of claims hasn’t come down that much, but the premiums haven’t gone up and what we saw in the three to four years after the banking crisis was there was a smaller pool of business to win, and it remains very much a buyers market.”

Iain Henry, who heads the Scottish division of global insurance broker Marsh, says in general terms, the recession “altered perceptions of insurance in the corporate space”.

He adds: “Traditionally, insurance was regarded as an ‘expense’ that offered protection against potential claims, however likely or unlikely and according to risk appetite.

“However, during the recession more businesses began leveraging insurance in more innovative ways to mitigate the risks they faced, such as covering bad debt and freeing cash from their balance sheets. And in the last decade insurance has earned a seat at the boardroom table.”

As the insurance market has moved into the boardroom, insuring against the reckless behaviour of a rogue executive director is no longer a cushion of comfort afforded to only the largest of PLCs.

According to Dunn, directors liability insurance is now big business and has filtered down to smaller firms.

“Directors liability insurance is now a very large market and also a very competitive one, and you only have to go back 15 years and there were three, maybe four, insurers who would insure directors liability whereas nowadays everyone writes it.

“And whereas years ago cover of this kind would generally only be bought by large PLCs, what you now see is the vast majority of owner-managed companies are buying it.

“Also, for the non-executive and independent directors, liability insurance is generally seen as a prerequisite to any agreement to take a seat on a board as independents and non-executives carry the same level of liability as an executive director in the event of any claim.

“But it should be noted, insurance will not cover wilful or criminal acts – it covers wrongful or alleged wrongful acts, and if it is a criminal act there is no cover against the penalty or fines imposed, though if wrongful act is proven criminal, the insurance is only valid until the act is proven criminal.”

New rules proposed by the Parliamentary Commission on Banking Standards, brought about in the wake of the LIBOR scandal, are to be put to industry consultation before introduction in 2015, and when implemented would mean senior staff in failed banks could face jail unless they prove they acted to mitigate risks, which critics argue is a reversal of the burden of proof.

The proposed new rules being brought in by the Bank of England’s regulatory division the Prudential Regulation Authority (PRA) and backed by the Financial Conduct Authority (FCA), are designed to make it easier to hold individual senior executives to account in the event of a bank collapse.

Andrew Tyrie MP, who chaired the Parliamentary Commission on Banking Standards, said: “The new senior managers regime will require banks to identify who is responsible for what at the very top. Implementation will require banks and regulators to exercise their judgement.”

A paper published by the PRA and the FCA proposed powers which include jail terms of up to seven years for reckless misconduct and senior executives would have to prove they were either not aware of or had challenged improper behaviour.

The proposed change has already prompted HSBC Bank’s audit and risk committee member Alan Thomson to resign and HSBC’s UK operations deputy chairman John Trueman has also indicated he may step down.

MacLean says: “The issue here is because it is proposing criminal sanctions, insurance would cover defence costs up to the point of a determination of criminal liability of an individual.

“So the defence costs to that point would be paid but obviously insurance is not going to cover any financial penalty if criminal liability is proven.

“It all depends what the accusation is.

“Clearly if fraudulent behaviour is proven there would be no insurance cover for that.

“But where there is an allegation of criminal conduct, this is already covered by existing policy offerings under the management liability of directors and officers, which is designed to protect individuals from claims against what may be bad decision making as opposed to criminal behaviour.”

After the banking crisis, the fallout from investment failures was prompted by a case raised by the Financial Services Compensation Scheme (FSCS) raised in 2011 against 475 independent financial advisory (IFA) firms for £75.6m in relation to compensation paid out for SLS-backed Keydata policies, which was widened in 2012 to pursue around 520 firms who sold Lifemark-backed Keydata products.

The result was many insurers withdrew from the IFA indemnity market altogether while those who stayed in the market pushed up their premiums as a result.

MacLean says the independent financial advisor (IFA) market remains a difficult one from an insurer’s standpoint.

“The IFA market has become a difficult one to place in the last couple of years, and IFAs now have far more arduous policy levels they have to sign up to.

“As a result they now have more robust cover than any other profession, and partly because of the nature of their role, they tend to have higher premiums than most other professions.

“But given some of the issues with IFAs which came to light post-banking crisis, this led to some insurers having exited that market entirely.”

One area of insurance which has benefited from recent legislative change has come from changes to employment law relating to employment tribunals.

Recent figures published by the Ministry of Justice reveal that since new rules were introduced by the coalition government in July 2013 – which included a new fee structure implemented in August 2013 which levied a charge of £1,200 for workers making claims against employers – the number of employment tribunal claims raised has fallen 59 per cent.

Dunn says: “We have seen an increase in the number of employment practice liability policies sold, and again, those premiums are getting cheaper because insurers aren’t paying out as much as they had prior to the new tribunal rules coming into force.”

Another, more traditional insurance product – trade credit insurance – has also been brought under the spotlight as a result of the recession, with the £6.5bn a year industry having made moves to mend its ways after being accused of exacerbating the problems of struggling companies.

Trade credit insurance – used to protect businesses against loss if clients run into difficulties – created its own bubble in the boom years, and again cover was provided with relatively scant detail provided by the policy purchasers.

While all was well in the economy this practice blossomed, though inevitably when the tide turned and policies were called in, particularly in the retail trade, the effect on the industry was far reaching.

As Dunn notes, trade credit insurance played a pivotal role in the brutal remapping of the high street in the recessionary years.

“The impact of trade credit insurance was massive because it got to a stage where insurers were cutting their limits and that meant companies couldn’t start to trade with new customers because they couldn’t get a credit limit.

“In fact, the insurers became so defensive the government had to step in with a scheme to underwrite some of the risk, though credit insurers didn’t view that positively and it is still very difficult to get proper credit limits for debtors.”

Bruce says the slump in the trade credit market has led companies to implement better risk controls. “I would prefer customers to use their own credit control methods, and really trade credit insurance is about risk transfer, so if a customer feels their methods and controls are not able to absorb those risks they may look to insure against a potential loss.

“But most firms nowadays will build in their own credit control methods, which they are usually pretty comfortable with.”

In Focus: The UK Insurance Bill

The UK insurance market is about to undergo a regulatory revamp after an eight-year consultation.

Much of the current law is governed by the Marine Insurance Act 1906, the principles of which were developed in the 18th and 19th centuries, and which has been adopted to reflect wider insurance law.

The Law Commissions of England and Wales, and Scotland reviewed the current legislation and found the law to now be “seriously out of date and out of line with modern commercial practices”.

The UK Insurance Bill, introduced to Parliament in July 2014 was taken from recommendations from those reports, which recommended the reform of four areas of business law – the duty of disclosure in business and other non-consumer insurance; the law of insurance warranties; Insurers’ remedies for fraudulent claims; and late payment of claims.

Recommended reforms would be a “default scheme for business insurance, leaving the parties free to agree alternative arrangements in their contracts provided they do so transparently”.

“The Insurance Bill seeks to redress some of the outdated provisions of the Marine Insurance Act 1906.For example, if passed in its current form, any breach of warranty will no longer automatically discharge an insurer from liability as from the date of the breach.

“The Insurance Bill proposes warranties will become ’suspensive’ conditions, so insurers will still be liable for losses under the policy prior to a breach of warranty and after the breach has been remedied.”

He adds: “While the changes afforded by the bill may not come into force until 2016, as brokers we are already looking to address, where possible, some of the inequitable provisions of the current law.”